Very few Africans make use of formal financial services. In fact, only 24% of adult Sub-Saharan Africans had a bank account in 2012, while the global average was 50%, says the Global Findex Database. In the following countries less than 10% had an account that year: Sudan, Senegal, DRC, Central African Republic, Chad, Niger, Madagascar and Mali.

The main reason for this low level of financial inclusion in Sub-Saharan Africa (SSA) is low income. Closely related is the fact that financial services are felt to be too expensive. Other notable barriers include distance to the nearest point of contact and onerous regulatory requirements.

Given the opportunities presented, many financial institutions operating in Africa have been spurred to reconsider the way in which they do business.

Key drivers of growth

The banking sector on the African continent managed to realise significant growth over the past decade. Encouragingly, this trend is expected to continue in the medium term, mainly driven by high economic growth and improved performance in relation to financial deepening.

However, in order to realise the significant growth potential outlined above, companies will need to find alternative approaches and innovative solutions to the problem of expanding the reach of financial services to the unbanked.

The emergence of mobile technology as an alternative to more traditional banking has allowed for services to be provided to lower income households often residing at distant rural locations.Mobile bankinghas achieved the broadest success in SSA, where 16% of adults reported having used a mobile phone in the 12 months leading to April 2012 to pay bills or send or receive money. This is compared with less than 5% in other regions. One of the most successful mobile banking models in Africa is considered to be Kenya’s M-Pesa, which caters to more than 14 million customers (70% of Kenya’s adult population).

Pan-African Banks

The growing presence of subsidiaries of major global banks on the continent has undoubtedly improved the availability and quality of financial services in recent years. However, large banks from well-developed financial markets on the African continent have made the biggest impact in this regard.

These banks mostly have their origins in South Africa and Nigeria. According to the European Investment Bank (EIB), “at least nine SSA-domiciled financial groups operate banks in seven or more other SSA countries.”

Standard Bank, Africa’s top bank by assets, has a comprehensive Africa presence with the company operating in around 17 SSA countries. Ecobank, with its roots in Togo, has the biggest presence in Africa, rendering banking services in 33 countries. These banks have assisted in improving competition as well as ensuring new technologies and methodologies are transferred across countries on the continent.

Alternative Financing Options

While banks are and will remain the backbone of African financial systems, a number of alternative financing options exist, upon which most low-income African households have traditionally resorted given limited access to formal banking products. These non-bank financial intermediaries (NBFIs) range from post-office savings banks to credit unions and other financial cooperatives to other formal and semi-formal microfinance providers, with their success and longevity ascribed to lower affordability, eligibility and product appropriateness barriers when compared with traditional banks.

Another mode of branchless banking that has received growing attention in recent years is bank agents, who tend to operate out of retail stores, gas stations or post offices.

An increasing numbers of banks are collaborating with NGOs to provide some form of new banking facilities to the largely unbanked rural population. These range from promoting a culture of savings and loan facilities in poor communities, to increasing financial literacy and the issuance of biometric smart cards as a means of formal identification so as to provide easier access for rural households to banking services.

Challenges to overcome

Even though African banking systems experienced marked improvements over the past decade in general, major challenges remain which could serve to constrain growth in the medium term.

Infrastructural weaknesses

The unavailability of efficient infrastructure remains a key challenge for a number of African countries and as such the cost of providing the necessary infrastructure adds significantly to the cost of doing business.

Weak regulatory frameworks

The global financial crisis encouraged many countries on the continent to embark on becoming compliant with international regulatory frameworks (e.g. Basel guidelines). However, progress in this regard varies greatly between countries and regions.

Probably one of the greatest constraints to growth in the African banking sector is that formal banking services remain too expensive for the vast majority of lower income households. Banks have limited incentive to develop products for the poor masses that currently cannot afford banking products and hence mostly compete at the higher end of the income distribution.

Excess liquidity

Banks in many countries continue to rely on government securities to generate earnings instead of growing loan books. In cases where loans are more prevalent, the interest rate spreads between loans and deposits are mostly large. The situation is compounded by the fact that in a number of African countries the necessary enablers to grow retail credit (e.g. identification and credit bureaus) are absent or, where they exist, are in a very nascent phase.

Technological backlogs

A white paper published by the Industrial Development Corporation (IDC) of South Africa in 2013 highlighted IT as a major operational challenge. The proliferation of multiple systems to deliver on operational needs, without a clear architecture governing interoperability and synergy, has resulted in its own unique issues.

Although the banking sector on the African continent faces various difficult challenges, it nonetheless has the potential to realise significant growth. Indeed the successful expansion of financial services into the retail sector including penetration of the lower income and ‘unbanked’ sectors of the population has the ability to be a catalyst for economic growth to ensure more inclusive, far-reaching economic growth.